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Old Mutual forecasts inflation to remain unchanged

21 May 2024 Old Mutual

As South Africa gears up for the release of StatsSA’s April's inflation figures on Wednesday 22 May, there's a sense of anticipation and concern.

With petrol prices rising and inflation looming large, consumers are bracing themselves for potential challenges ahead. Old Mutual Group Chief Economist, Johann Els anticipates that inflation will likely remain unchanged at 5.3%, with potential relief expected in subsequent months due to easing petrol prices.

One of the primary drivers behind the recent higher-for-longer inflationary trend is the series of petrol price hikes witnessed throughout the year. According to Els, these increases, spanning from February to May, have exerted considerable pressure on consumer spending patterns. Given that transportation costs represent a significant portion of household budgets, any fluctuations in the petrol price will inevitably have ripple effects across various economic sectors.

According to Els, “this figure, while consistent with recent trends, poses challenges as it exceeds the South African Reserve Bank's target, potentially dampening economic sentiment”. He further highlights the complex relationship between petrol prices and broader inflationary trends, emphasising their impact on consumer spending patterns and the economy at large. Notably, the base effect, coupled with petrol price hikes, contributes to the complexity of the inflationary landscape, necessitating a nuanced approach to monetary policy.

Els highlights the ripple effects of these dynamics on food inflation, a critical component of the CPI basket. While March witnessed further easing in food inflation to 4.9%, Els anticipates a potential further moderation to below 4.5% for April, albeit against the backdrop of increasing significance attributed to the base effect.

Moreover, Els notes a substantial decline in the weighted average inflation rate for consumer goods over the past year, falling from 5.6% to 4.2%. According to Els, “This trend underscores the deflationary impact of petrol price hikes on consumer spending habits, influencing categories such as clothing, footwear, furniture, appliances, and vehicles.”

While the short-term outlook for inflation appears to be a plateauing at 5.3% - with headline inflation only dipping to the 4.5% mid-point of the target range in the third quarter - the Reserve Bank faces a delicate balancing act, aiming to curb inflation without stifling economic growth through excessively high-interest rates. Long-term solutions may involve addressing structural issues that contribute to inflationary pressures, such as supply chain bottlenecks, administered price settings, and import dependence.

Looking ahead, Els cautions against the potential repercussions of prolonged maintenance of high-interest rates, highlighting the risk of driving consumer goods inflation substantially lower to mitigate headline inflation. While external cost push factors such as the Rand exchange rate and oil prices remain beyond the Reserve Bank's direct influence, he further the South African Reserve Bank’s capacity to influence other price dynamics significantly.

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